16 September 2014
Analysts
Damien Williamson 613 9235 1958
Barry Ziegler 613 9235 1848
Macquarie Bank Capital Notes
(MBLPA)
Authorisation
TS Lim 612 8224 2810
Take advantage while there still is quality new supply
The new $400m Macquarie Bank Capital Notes (MBLPA) offers investors another well
priced new Additional Tier 1 hybrid security from a quality issuer. The partially franked
dividend may suit investors seeking a greater cash dividend income. Assuming the
margin is set a 3.10%, bottom end of the 3.10-3.30% bookbuild range, income based
on current 180BBSW of 2.70% is 5.80% gross. Reducing franking from 100% to 40%
boosts cash income from 4.06% to 4.95%. As international income represented 68%
of Macquarie’s FY14 total income, ongoing dividends should remain partially franked.
Fixed
Income
Issue overview
Issuer
Macquarie Bank
Issue ASX code
MBLPA
Face value
$100
Estimated offer size
Bookbuild margin
$400m
As the largest non major bank issue since the $600m MQGPA in May 2013, MBLPA
could well be the last bank hybrid issue in 2014. The only top 200 ASX listed banks not
to launch Additional Tier 1 securities in 2014 are BOQ and NAB (2013 raised $3.2bn:
$1.5bn NABPA, $1.7bn NABPB). While there has been a flurry of new issuance over
recent weeks with $3.2bn raised from CBAPD ($2.6bn), CGFPA ($340m) and BENPE
($250m), this essentially offsets the $3bn of pending redemptions over Sep/Oct 2014.
Figure 1: Fair margin on MBLPA
3.10-3.30%
Franking
Yield Incremental
6.00% Margin
40%
Bookbuild: BBSW + 3.10-3.30%
Bell Potter target margin: BBSW + 3.05%
Dividend payments
First dividend payment
2.30%: MBLPA preference share margin
4.00%
$5,000
First optional exchange
24 Mar 2020
Mandatory exchange
24 Mar 2023
Timeline
Lodgement of prospectus 15 Sep 2014
19 Sep 2014
Announcement of margin 23 Sep 2014
Offer opens
Preference
share margin
24 Mar 2015
Minimum application
Bookbuild margin
5.00%
Half yearly
Senior
debt
3.00%
0.75%: NAB Nov 2019 OTC margin
BOQ Jun 2018 OTC margin
BBSW
2.00%
2.70%: 180 BBSW
SOURCE: YIELDBROKER, BELL POTTER
Overall we assess a MBLPA fair margin of 3.05%, equating to a 2.30% margin
premium on NAB Nov 2019 wholesale senior debt (0.75% trading margin). This also
equates to a 0.40% premium above our assessed 2.65% fair margin on CBAPD (Dec
2022 call).
The combination of historically high issue margins, prospect of
improvement in credit spreads and reduced new issuance pipeline provides the
potential for MBLPA to trade at a modest premium.
Figure 2: Trading margins on debt and equity securities
23 Sep 2014
Ranking
Security
Offer closes:
Securityholder & general
3 Oct 2014
Broker firm
7 Oct 2014
Higher Ranking Senior debt
8 Oct 2014
ASX listing (deferred settlement)
9 Oct 2014
First
Call
75bp
Nov 2019
AMPHA
190bp
Dec 2023 Dec 2018
Preference securities MQGPA
320bp
Jun 2021 Jun 2018
310-330bp
Mar 2023 Mar 2020
Subordinated debt
Issue date
Trading Margin Maturity /
over BBSW Mand Conv
NAB (OTC) senior
MBLPA (Additional Tier 1)
Lower Ranking Equity
Ordinary MQG shares
~400bp
Perpetual
SOURCE: Y IELDBROKER, BELL POTTER
Key features
Additional Disclosure: Bell Potter
Securities Limited is acting as Comanager to the MBLPA issue and will
receive fees for this service.
BELL POTTER SECURITIES LIMITED
ACN 25 006 390 772
AFSL 243480
Initial grossed up running yield of 5.80% (4.95% cash yield franked at 40%):
Floating rate based on 180BBSW of 2.70% + bookbuild margin of 3.10%.
First option to redeem or convert at Mar 2020. Mandatory exchange Mar 2023.
Subject to APRA approval, Macquarie has the option to redeem or convert at the
Optional Exchange Dates on 24 Mar 2020, 24 Sep 2020 and 24 Mar 2021.
Ordinary dividend restrictions: Applies on the non payment of MBLPA dividends
Automatic conversion under the Capital Trigger / Non-Viability Trigger Events
DISCLAIMER AND DISCLOSURES THIS REPORT MUST
BE READ WITH THE DISCLAIMER AND DISCLOSURES
ON PAGE 12 THAT FORM PART OF IT.
Page 1
Macquarie Bank Capital Notes
16 September 2014
Macquarie Bank Capital Notes
Macquarie Bank Overview
MBLPA represents a Capital Note of Macquarie Bank Limited (MBL). This security is
fully paid, subordinated, non-cumulative, unsecured and potentially perpetual if
conditions for Exchange are not met. Issue terms provide for conversion at the
Mandatory Exchange date in March 2023, while Trigger Events may result in
automatic conversion.
With a history dating back to 1969, MBL is an Authorised Deposit Taking Institution
(ADI) regulated by APRA providing banking, financial, advisory, investment and funds
management services to institutional, corporate and retail clients and counterparties
around the world. In November 2007, Macquarie Group (MQG) was formed as a result
of a corporate restructure, comprising a Bank Group and a Non-Bank Group. MQG is
currently the 13th largest ASX listed company with a market cap of $18.6bn. In the
year to March 2014, MBL contributed $752m to MQG’s net profit of $1,265m. MBL
consists of five operating groups:
•
Corporate & Asset Finance: Corporate debt and asset financing across
aircraft, motor vehicles, technology, healthcare, manufacturing, industrial,
energy, rail and mining equipment. FY14 net profit before corporate overhead
up 19% to $826m, with its asset finance and corporate lending portfolio
increasing 14% to $25.5bn, while its real estate lending portfolio increased 12%
to $9.0bn.
•
Banking & Financial Services: Provides personal banking, wealth
management and business banking products and services to retail clients,
advisers, brokers and business clients. FY14 net profit before corporate
overhead up 7% to $260m, driven by mortgage portfolio growth, 20% organic
growth in funds under administration, and profit on sale of its 19.9% interest in
OzForex via its IPO.
•
Macquarie Funds: Global asset manager offering a diverse range of products.
FY14 net profit before corporate overhead up 39% to $1,051m, driven by
increased annuity base fee income and a 24% increase in assets under
management to $425bn. $579m of this profit is attributable to the Non-Bank
Group for Macquarie Infrastructure and Real Estate Division.
•
Fixed Income, Currencies & Commodities (FICC): Provides trading, risk
management, sales, structuring, financing and market analysis and strategy
services. FY14 net profit before corporate overhead up 29% to $726m, boosted
by a 58% increase in income from commodities related activities. $83m of this
profit is attributable to the Non-Bank Group for certain assets of the Credit
Trading business and other less financially significant activities of FICC.
•
Macquarie Securities: Global institutional securities house. FY14 net profit
before corporate overhead $107m vs FY13 loss of $50m, boosted by increased
market volumes and equities capital markets activities. $89m of this profit is
attributable to the Non-Bank Group for certain activities of the Cash division
and the Derivatives function of Macquarie Securities.
In addition, to parts of the Macquarie Funds, FICC and Macquarie Securities divisions
outlined above, the Non-Bank Group also consists of:
•
Macquarie Capital: Offers a range of advisory and capital raising services.
FY14 net profit before corporate overhead up 84% to $269m, ranking number 1
in Australia for announced and completed mergers and acquisitions
transactions in 2013 with 450 transactions worth $89bn.
Page 2
Macquarie Bank Capital Notes
16 September 2014
Macquarie Bank Capital Notes
Macquarie Bank Financials
At March 2014, MBL had total assets of $139.9bn, which included $57.7bn of loan
assets. The loan book is predominately weighted towards mortgages (42.8%),
corporate and commercial lending (27.5%) and lease and retail financing (18.9%).
Figure 3: Macquarie Bank Loan Assets
Macquarie Bank Loan Assets
Year Ending 31 March
FY14
% loans
FY13
$bn
% loans
$bn
Growth
FY14 vs FY13
Mortgages
24.7
42.8%
20.8
41.8%
19.0%
Corporate & commercial
15.9
27.5%
13.2
26.5%
20.6%
Lease and retail financing
10.9
18.9%
9.6
19.3%
14.1%
6.2
10.8%
6.2
12.5%
Other
Total Loans
57.7
0.6%
49.7
16.2%
SOURCE: COM PANY DATA, BELL POTTER
MBL asset quality remained sound in FY14 with the impairment charge of $350m
equating to 0.25% of the $139.9bn asset base.
Figure 4: Macquarie Segment Net Profit, Assets and Impairment Charge
FY14 Net Profit ($m)
Division
Bank Non Bank
FY14 Segment Assets ($m)
Group
Bank Non Bank
Group
Macquarie Funds
472
579
1,051
6,365
2,217
8,582
Corporate and Asset Finance
816
10
826
26,370
173
26,543
Banking and Financial Services
261
-1
260
29,611
1
29,612
18
89
107
20,830
5,185
26,015
643
83
726
43,646
1,165
44,811
0
280
280
0
2,885
2,885
-1,458
-527
-1,985
13,089
2,367
15,456
752
513
1,265
139,911
13,993
153,904
Macquarie Securities
Fixed Income, Currencies & Commodities
Macquarie Capital
Corporate
Total
FY14 Impairment ($m)
Division
Bank Non Bank
Macquarie Funds
0
Impairment / Segment Assets %
Group
4
Bank Non Bank
Group
4
Corporate and Asset Finance
-85
0
-85
0.32%
0.32%
Banking and Financial Services
-49
2
-47
0.17%
0.16%
Macquarie Securities
Fixed Income, Currencies & Commodities
Macquarie Capital
Corporate
Total
-5
0
-5
0.02%
-206
158
-48
0.47%
-13.56%
0.02%
0.11%
0
-208
-208
7.21%
7.21%
-5
-113
-118
0.04%
4.77%
0.76%
-350
-157
-507
0.25%
1.12%
0.33%
SOURCE: COM PANY DA TA, BELL POTTER
At 31 March 2014, Macquarie’s CET1 ratio was sound at 9.62%, equating to a
$2.95bn surplus over 5.125% threshold for the Capital Trigger Event.
Figure 5: APRA Basel III Common Equity Tier 1 Capital at 31 March 2014
APRA Basel III Capital Adequacy
At March 2014
7.00% CET1 5.125% CET1
$m
% RWA
Surplus $m
Surplus $m
Common Equity Tier 1 (CET1)
6,318
9.62%
1,719
2,951
Tier 1
6,961
10.60%
Risk Weighted Assets (RWA)
65,698
SOURCE: COM PANY DATA, BELL POTTER
Page 3
Macquarie Bank Capital Notes
16 September 2014
Macquarie Bank Capital Notes
Historically high margins limit downside risk
Given the improvement in the ASX listed debt and hybrid market and wholesale
markets, the 3.10-3.30% MBLPA margin range remains elevated compared with pre
GFC levels.
Figure 6: New Issue margins on comparative financial preference shares and capital notes
Listing Date Issuer ASX Code Description
Margin over BBSW
Listing Date Issuer ASX Code Description
Margin over BBSW
7-Apr-06
CBA
PCAPA
PERLS III
1.05%
7-Nov-12
SUN
SUNPC
22-Jun-06
WBC
WCTPA
Trust Preferred Securities
1.00%
27-Dec-12
BOQ
BOQPD Convertible Preference Shares
5.10%
11-Jul-07
CBA
CBAPB
PERLS IV
1.05%
12-Mar-13
WBC
WBCPD Capital Notes
3.20%
Convertible Preference Shares
3.20%
21-Mar-13
NAB
NABPA
2.40%
11-Jun-13
MQG
MQGPA Capital Notes
4.00%
3.40%
13-Jun-08
SUN
SBKPB
29-Jul-08
WBC
WBCPA Stapled Preferred Securities
Convertible Preference Shares 2
Convertible Preference Shares
4.65%
3.20%
1-Oct-08
ANZ
ANZPB
Convertible Preference Shares
2.50%
8-Aug-13
ANZ
ANZPD
Capital Notes
30-Mar-09
WBC
WBCPB Stapled Preferred Securities II
3.80%
18-Dec-13
NAB
NABPB
Convertible Preference Shares II
3.25%
13-Oct-09
CBA
CBAPA
PERLS V
3.40%
1-Apr-14
ANZ
ANZPE
Capital Notes 2
3.25%
18-Dec-09
ANZ
ANZPA
Convertible Preference Shares 2
3.10%
9-May-14
SUN
SUNPE
Convertible Preference Shares 3
29-Sep-11
ANZ
ANZPC
Convertible Preference Shares 3
3.10%
24-Jun-14
WBC
WBCPE Capital Notes 2
26-Mar-12
WBC
WBCPC Convertible Preference Shares
2-May-12
IAG
IAGPC
3.40%
3.05%
3.25%
2-Oct-14
CBA
CBAPD
PERLS VII Capital Notes
2.80%
Convertible Preference Shares
4.00%
8-Oct-14
CGF
CGFPA
Capital Notes
3.40%
3.10-3.30%
18-Oct-12
CBA
CBAPC
PERLS VI
3.80%
9-Oct-14
MQG
MBLPA
Capital Notes
1-Nov-12
BEN
BENPD
Convertible Preference Shares
5.00%
13-Oct-14
BEN
BENPE
Convertible Preference Shares 2
3.20%
SOURCE: COM PANY DATA, BELL POTTER
Closing margin gap between financial and major bank prefs
In mid 2008, the margin differential between a Macquarie and a major bank pref was
1.10%. WBCPA (Sep 2013 mandatory conversion) was priced at a margin of 2.40%
above 90BBSW, while MQCPA (June 2013 mandatory conversion) was priced at a
margin of 3.50% above 5 year swap. In early 2013 this narrowed to 0.80%. WBCPD
(Mar 2019 call) was priced at a margin of 3.20% above 90BBSW, versus MQGPA (Jun
2018 call) at 4.00% above 180BBSW. This has closed to potentially 0.30% with
CBAPD (Dec 2022 call) priced at 2.80% above 90BBSW, while bottom end of the
MBLPA (Mar 2020 call) bookbuild margin is 3.10% above 180BBSW. On an adjusted
basis, this 0.30% is effectively ~0.55% allowing for the 2.75 years shorter duration on
MBLPA.
If we compare the trading margin differential between MQGPA (Jun 2018 call) and
CBAPC (Dec 2018 call) since MQGPA listed in June 2013, MQGPA’s trading margin
has on average been 0.75% higher than CBAPC (3.54% vs 2.79%). Over 2014 this
has narrowed to 0.47% (3.18% vs 2.71%), narrowing as much as 0.29% (2.74% vs
2.45%) in trading since 1 July 2014.
Figure 7: Trading margin on CBAPC and MQGPA
4.5%
MQGPA
4.0%
3.5%
3.0%
2.5%
CBAPC
SOURCE: IRESS, BELL POTTER
2.0%
Jun-13
Aug-13
Oct-13
Jan-14
Mar-14
Jun-14
Aug-14
Page 4
Macquarie Bank Capital Notes
16 September 2014
Macquarie Bank Capital Notes
Bookbuild margin range attractive relative to financial prefs
The recovery in credit markets is highlighted by the chart in Figure 8 which tracks the
average trading margins since January 2013 splits across 5 sectors:
* Financial Prefs (BENPD, BOQPD, IAGPC, IANG, MQGPA, SUNPC, SUNPE)
* Industrial Subordinated Debt (AGKHA, AQHHA, CTXHA, CWNHA, ORGHA, TAHHB)
* Bank Prefs (ANZPA, ANZPC, ANZPD, ANZPE, CBAPC, NABPA, NABPB, WBCPC, WBCPD, WBCPE)
* Financial Subordinated Debt (AMPHA, AYUHA, CNGHA, SUNPD)
* Bank Subordinated Debt (ANZHA, NABHB, WBCHA, WBCHB).
Up until early 2014, the two sectors with lower trading margins to major bank prefs were
major bank subordinated debt and financial subordinated debt. As at 2 September
2014, the major bank prefs are at the upper end of these five sectors, on a trading
margin fractionally below the lower rated financial prefs.
It is also worth noting the average of the average trading margin on the seven financial
prefs from BEN, BOQ, IAG, MQG and SUN was continuously below 3.00% between 20
May 2014 and 8 September 2014, hitting a low of 2.43% on 1 August 2014. This
highlighting the attractiveness of the 3.10-3.30% bookbuild margin range on MBLPA,
particularly once the market digests the four current issues.
The lack of new supply up until mid August 2014 saw trading margins firming lower.
The launch of CBAPD, CGFPA, BENPE and MBLPA has seen greater value emerge in
the major bank prefs and the financial prefs. These sectors have dominated new
issuance since early 2013.
Lack of supply of new debt securities combined with redemptions has been a key factor
behind the greater margin compression of the other three debt sectors.
Figure 8: Trading margins on ASX listed debt and hybrid sectors
4.0%
3.5%
Financial Prefs
3.0%
Industrial Sub Debt
2.5%
Bank Prefs
2.0%
Financial Sub Debt
1.5%
Bank Sub Debt
1-Sep-14
2-Aug-14
3-Jul-14
3-Jun-14
4-May-14
4-Apr-14
5-Mar-14
3-Feb-14
4-Jan-14
5-Dec-13
5-Nov-13
6-Oct-13
6-Sep-13
7-Aug-13
8-Jul-13
8-Jun-13
9-May-13
9-Apr-13
10-Mar-13
8-Feb-13
9-Jan-13
1.0%
SOURCES: YIELDBROKER,
IRESS, BELL POTTER
Page 5
Macquarie Bank Capital Notes
16 September 2014
Macquarie Bank Capital Notes
$3bn of redemption money looking for a home
Prior to the launch of CBAPD only $3,371m had been raised in the 4 issues in 2014.
Factoring in year-to-date redemptions of $1,166m reduced net raisings to $2,205m.
Over Sep / Oct 2014, it is expected six ASX listed debt & hybrids will be redeemed, with
a face value of $3,054m. The CBAPD, CGFPA, BENPE and MBLPA issues currently
have the potential to raise $3,590m, only adding $536m of net new issuance.
Figure 9: New ASX listed debt and hybrid issues: August 2011 - September 2014
$3000m
$2500m
$2000m
2012
19 issues
$13,157m
2H11
4 issues
$3,163m
1509
$1500m 1340
$1000m
900
$500m
1676
223
1717
250
377
269
30
300
155
600
305
325
$10000m
Bell Potter Co
Managed Issues
Cumulative (RHS)
340 400
$5000m
250
400
50
$0m
ANZPC
WOWHC
ORGHA
AFIG
TAHHB
ANZHA
CNGHA
WBCPC
AGKHA
IAGPC
NABHB
HBSHB
TTSHA
WHFPB
WBCHA
CTXHA
AQHHA
CWNHA
CBAPC
BENPD
SUNPC
BOQPD
MYBG
WBCPD
NABPA
HLNGA
SUNPD
MQGPA
ANZPD
WBCHB
AMPHA
NABPB
ANZPE
SUNPE
IMFHA
WBCPE
CBAPD
CGFPA
BENPE
MBLPA
$0m
228
195
$15000m
1311
925
770
560
$20000m
1610
1120
550 532
515
$25000m
2014
4 issues
$6,961m
1514
1384
1173
650
700
2600
2000
1189
1000
$30000m
2013
9 issues
$8,660m
SOURCE: COMPANY DATA, BELL POTTER
Since Sep 2012, new issuance has been dominated by financial issuers, with 19 of the
22 issues. While 2014 has seen BEN, IAG, WBC and ANZ all issue Tier 2 subordinated
debt securities in the wholesale market, every ASX listed financial issue this year has
been an Additional Tier 1 hybrid. If bank new issuance is aligned with replacement of
maturing securities, the next two hybrid issues could be for BENPB ($90m) ahead of its
June 2015 step-up date and PCAPA ($1,167m) ahead of its April 2016 step-up date.
Figure 10: Pending redemptions of ASX listed debt and hybrid securities
Security Call / Maturity Amount ($m) Replacement Issue Considerations
BENHA
17-Mar-14
90.5
No - Jan 2014 $300m Basel III compliant Tier 2 subordinated debt issue (wholesale)
TAHHA
1-May-14
284.5
No - Senior debt refinancing
AQNHA
ANZPB
15-May-14
16-Jun-14
172.1
454.3
AMPHA
ANZPE
LEPHC
20-Aug-14
165.0
No - Senior debt refinancing
AAZPB
12-Sep-14
275.0
Redemption $100 cash + $1.5155 interest (74 days) on 12 Sep 2014 following Change of Control event
2014 YTD Redemptions
TPAPA
30-Sep-14
1,441.4
250.0
Redemption $100 cash + $3.05 fully franked on 30 Sep 2014 following sale of NZ Business
WBCPB
BENPC
30-Sep-14
10-Oct-14
379.4
100.0
HBSHA
CBAPA
27-Oct-14
31-Oct-14
50.0
2,000.0
"Strong preference" to redeem at 27 Oct 2014 step-up date (subject to APRA approval). Multiple refinancing options.
$2.6bn CBAPD offer
2,779.4
90.0
152.3
Chance of Basel III compliant Tier 1 replacement issue - BENPE raising may be sufficient to fund redemption
Senior debt refinancing increasingly likely
Total 2014 (rem aining)
BENPB
15-Jun-15
PRYHA
28-Sep-15
CBAHA
24-Dec-15
Total 2015
PCAPA
6-Apr-16
570.0
812.3
1,166.5
Remaining securities from WBCPE offer will be redeemed
$250m BENPE offer
Ease of raising wholesale senior debt vs ASX listed
Basel III compliant Tier 1 replacement issue expected
AYUHA
PPCG
14-Apr-16
16-Jun-16
120.0
50.0
Multiple refiancing options
Potential ASX issue for funding diversification
WCTPA
WOWHC
30-Jun-16
24-Nov-16
762.7
700.2
Basel III compliant Tier 1 replacement issue expected
WOWHA (1999) replaced by WOWHB (2006). WOWHC (2011) launched shortly after WOWHB redemption
ANZPA
15-Dec-16
1,968.7
Basel III compliant Tier 1 replacement issue expected
ORGHA
22-Dec-16
Total 2016
900.0
5,668.2
Gearing likely to reduce following completion of APLNG
SOURCE: COM PANY DATA, BELL POTTER
Page 6
Macquarie Bank Capital Notes
16 September 2014
Macquarie Bank Capital Notes
Mandatory Exchange Conditions
In order for bank Convertible Preference Shares (CPS) and Capital Notes to qualify as
Additional Tier 1 capital, APRA has imposed a maximum conversion number in order
to limit the dilution of ordinary shares upon conversion.
This maximum conversion number represents the face value of the preference share
divided by 50% of the volume weighted average price (VWAP) of the issuer on the 20
business days preceding the issue date (Issue Date VWAP). For example, if MQG’s
20 day VWAP was $57.95 before the issue date, the maximum conversion number
would be 3.45 MQG shares per MBLPA security (i.e. $100 / (50% x $57.95)).
To protect MBLPA holders from receiving less than face value at Mandatory
Exchange, there are a number of Exchange Conditions to be aware of:
First: VWAP of ordinary shares on the 25th business day before a possible
Mandatory Exchange Date (17 Feb 2023) must be above 56% of the Issue Date
VWAP. Using the MQG price on 12 Sep 2014 of $57.95 x 56% = $32.54.
Second: VWAP of ordinary shares during the 20 business days immediately
preceding a potential Mandatory Exchange Date (24 Feb 2023 - 23 Mar 2023)
must be greater than 50.51% of the MBLPA Issue Date VWAP (i.e. $29.27).
Third / Fourth: Continuous trading prior to a possible Mandatory Exchange Date to provide protection should investors wish to sell the ordinary shares they receive
upon conversion. A Suspension Event (third exchange condition) and a Delisting
Event (fourth exchange condition) occurs when MQG is delisted or suspended, or
there is an Inability Event.
If the Mandatory Exchange Conditions are not satisfied, conversion on the Mandatory
Exchange Date will not occur. Under this scenario, the security will remain on issue
and continue to pay dividends at the same margin. The Exchange Conditions will be
tested on each subsequent future half yearly dividend date.
Figure 11: Mandatory Exchange Conditions
MQGPA
Date of Hybrid Issue
Mandatory Conversion Date
Conversion Discount
ANZPA
ANZPC
ANZPD
ANZPE
BENPD
BOQPD
CBAPC
IAGPC
MQGPA
8-Oct-14 18-Dec-09 29-Sep-11 7-Aug-13 31-Mar-14 1-Nov-12 24-Dec-12 17-Oct-12 1-May-12 8-Jul-08
24-Mar-23 15-Dec-16 1-Sep-17
NABPA
NABPB
SUNPC
SUNPE
WBCPC
WBCPD
WBCPE
20-Mar-13 17-Dec-13 20-Mar-13 8-May-14 23-Mar-12 8-Mar-13 15-Jun-14
1-Sep-23 24-Mar-22 13-Dec-19 15-Apr-20 15-Dec-20 1-May-19 7-Jun-18 22-Mar-21 19-Dec-22 22-Mar-21 17-Jun-22 30-Mar-20 8-Mar-21 23-Sep-24
1.0%
1.0%
1.0%
1.0%
1.0%
2.5%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
1.0%
Issue Date VWAP
$57.95
$21.80
$19.53
$29.16
$32.30
$7.98
$7.11
$56.08
$3.46
$42.42
$30.64
$33.86
$9.49
$12.92
$20.83
$29.89
$34.37
50% Dilution Cap
Max Conv No (Face Value/Dilution Cap)
$28.98
$10.90
$9.77
$14.58
$16.15
$3.99
$3.55
$28.04
$1.73
$21.21
$15.32
$16.93
$4.75
$6.46
$10.42
$14.95
$17.23
3.45
9.17
10.24
6.86
6.19
25.06
28.15
3.57
57.80
4.71
6.53
5.91
21.07
15.48
9.60
6.69
5.81
Conv Test 1 - % Issue Date VWAP
56.00%
56.00%
56.00%
56.00%
56.00%
57.50%
56.12%
56.00%
57.50%
55.56%
56.00%
56.00%
56.00%
55.00%
55.56%
56.12%
56.12%
Conv Test 1 Security Price
$32.45
$12.21
$10.94
$16.33
$18.09
$4.59
$3.99
$31.41
$1.99
$23.57
$17.16
$18.96
$5.31
$7.11
$11.57
$16.77
$19.33
Conv Test 2 - % Issue Date VWAP
50.51%
50.51%
51.28%
50.51%
51.28%
51.28%
50.51%
50.51%
50.51%
50.51%
50.51%
50.51%
50.51%
50.51%
50.51%
50.51%
50.51%
Conv Test 2 Security Price
$17.40
$29.27
$11.01
$10.01
$14.73
$16.56
$4.09
$3.59
$28.33
$1.75
$21.43
$15.48
$17.10
$4.79
$6.53
$10.52
$15.10
Conv Test 3 - Continuous Trading
Yes
Yes
Yes
Yes
Yes
Yes
Yes
n/a
Yes
Yes
Yes
Yes
Yes
Yes
n/a
n/a
n/a
Parent Share Price - 12 Sep 2014
$57.95
$32.83
$32.83
$32.83
$32.83
$12.60
$12.56
$80.23
$6.15
$57.95
$34.25
$34.25
$14.55
$14.55
$34.25
$34.25
$34.09
Prem/Disc to Dilution Cap
100.0%
201.2%
236.2%
125.2%
103.3%
215.8%
253.5%
186.1%
255.5%
173.2%
123.6%
102.3%
206.6%
125.2%
228.9%
129.2%
97.9%
Prem/Disc to Conversion Test 1
78.6%
168.9%
200.2%
101.0%
81.5%
174.6%
215.0%
155.5%
209.1%
145.9%
99.6%
80.6%
173.8%
104.8%
195.9%
104.2%
76.3%
SOURCE: COM PANY DATA, B ELL POTTER
Page 7
Macquarie Bank Capital Notes
16 September 2014
Macquarie Bank Capital Notes
Early Conversion Events: Capital Trigger and Non-Viability
The fallout from the Global Financial Crisis has seen the Basel Committee on Banking
Supervision establish new capital reforms to be phased in between 1 January 2013
and 1 January 2019. The key objective of these new reforms is to ensure banks are
adequately capitalised in the event of future crises. On 28 September 2012, APRA
published its final Basel III prudential standards which include a number of changes to
the eligibility criteria for capital instruments, including stricter criteria for instruments to
qualify as Additional Tier 1 Capital.
These requirements include a Capital Trigger Event and a Non-Viability Trigger Event,
where securities such as MBLPA must be converted into ordinary equity if the financial
position of MBL requires an immediate injection of capital. These prudential standards
also require Australian banks to hold a minimum Common Equity Tier 1 Capital Ratio
of 4.5% on 1 Jan 2013. This increases to 7.0% on 1 Jan 2016 after inclusion of the
2.5% Capital Conservation Buffer.
Capital Trigger Event
A Capital Trigger Event occurs when either MBL determines, or when APRA notifies
MBL that it believes MBL’s Common Equity Tier 1 Capital Ratio has is equal to or less
than 5.125%. Under this Trigger, MBL must immediately Exchange enough MBLPA
securities to boost the Common Equity Tier 1 (CET1) Capital Ratio above 5.125%.
MBL’s Basel III Common Equity Tier 1 Capital Ratio at 31 March 2014 stood at 9.62%,
providing a buffer of $2,951m. If we include MBL’s net profit for the 12 months to
March 2014 of $752m, a breach of the Common Equity Trigger requirement appears
low, particularly as Macquarie has options such as cutting ordinary dividends,
divesting assets and raising equity.
Non-Viability Trigger Event
In addition, MBLPA will be Exchanged if APRA determines that MBL would be nonviable in the absence of an exchange or a public sector injection of capital. We note
there are currently no precedents for a Non-Viability Trigger Event. Types of situations
in which APRA may become concerned about non-viability include being insolvent,
significant capital losses and financial stress, prolonged difficulties in raising funding
in the public or private market, or maintaining sufficient liquidity.
Potential for Loss under Trigger Event if MQG under $11.59
Conversion resulting from a Capital Trigger Event or a Non-Viability Trigger Event will
be done at the VWAP of MQG shares traded on the 5 Business Days immediately
preceding the Exchange Date. While this is not subject to the Mandatory Exchange
Conditions, it is still subject to the Maximum Exchange Number, which represents the
face value of the preference share dividend by 20% of the issue date VWAP. If MQG’s
20 issue date VWAP was $57.95, the maximum conversion number would be 8.63
MQG shares per MBLPA security (i.e. $100 / (20% x $57.95)). As such, MBLPA
investors may exposed to receiving less than face value if MBLPA is converted at less
than $11.59. In practice this will only occur in the unlikely scenario that the issuer
suffers severe impairment losses and does not raise equity to absorb those losses.
As it is likely that conversion under one of these Trigger Events would occur prior to a
company Wind Up, MBLPA holders will hold ordinary shares and rank equally with
other holders of ordinary shares (i.e. lose priority ranking).
Page 8
Macquarie Bank Capital Notes
16 September 2014
Macquarie Bank Capital Notes
Inability Event
One additional risk is an Inability Event where MBLPA will be written off if Macquarie is
not able to issue ordinary MQG shares from Exchange within five Business Days of
the Trigger Event Conversion Date (i.e. Capital Trigger Event or Non-Viability Trigger
Event). Scenarios under which this may occur include Macquarie being prevented
from issuing ordinary shares by circumstances outside of its control, including an
applicable law or order of any court, or action of any Government authority from
issuing shares.
Under an Inability Event, MBLPA holder’s rights (including to dividends and face
value) are immediately and irrevocably terminated, resulting in MBLPA losing its value
and investors will not receive any compensation.
ASIC “Be wary of the risks” warning: Money Smart website
ASIC’s Money Smart website provides information for retail investors who are
considering investing in “Complex Investments” such as hybrid securities:
www.moneysmart.gov.au/investing/complex-investments/hybrid-securities-and-notes
Basically, hybrid securities (including subordinated notes and convertible preference
shares) may be from well-known companies but they are very different from 'normal'
corporate bonds.
Some hybrid securities make investors take on 'equity-like' risks. Some also have
terms and conditions that allow the issuer to exit the deal or suspend interest
payments when they choose. Some are very long-term investments (for example,
more than 20 years).
Hybrid securities may be unsuitable for you if you need steady returns or capital
security typically from a bank term deposit style of investment.
Page 9
Macquarie Bank Capital Notes
16 September 2014
Macquarie Bank Capital Notes
Other investment risks
Key Security Risks include:
•
MBLPA is not a bank deposit protected by the Government guarantee scheme.
•
As preferred equity, MBLPA ranks behind deposits, senior debt and
subordinated debt in MBL.
•
MBLPA dividends are at MBL’s discretion and are non-cumulative.
•
MBLPA dividend payments must not result in a breach of MBL’s capital
adequacy requirements under APRA’s prudential standards, or payment must
not result in MBL becoming insolvent.
•
Adverse movement in credit spreads as a result of a tightening in the
availability and cost of credit.
•
New issues may offer more attractive issue terms and margins, placing
downward pressure on the security price.
•
Adverse change in MBL’s and financial performance which combined with a
major bad debt event could lead to the Common Equity Tier 1 Capital Ratio
falling below 5.125%, resulting in automatic conversion under the Common
Equity Trigger Event. Automatic conversion may also be required under the
Non-Viability Trigger Event.
•
MBLPA will lose its value and investors will not receive any compensation if
Macquarie is not able to issue ordinary shares in MQG within 5 business days
from Exchange under a Capital Trigger Event or Non-Viability Trigger.
Scenarios under which this may occur include Macquarie being prevented from
issuing ordinary shares by circumstances outside of its control, including an
applicable law or order of any court, or action of any Government authority from
issuing shares.
•
Conversion of MBLPA at the March 2023 Mandatory Conversion Date requires
MQG’s share price at the time of Mandatory Conversion to be above certain
thresholds. If these thresholds are not met in March 2023 or at future half
yearly dividend payment dates, MBLPA may remain on issue indefinitely.
Page 10
Macquarie Bank Capital Notes
16 September 2014
Macquarie Bank Capital Notes
Other investment risks
Key Business Risks of Macquarie include:
•
Adverse financial performance of MQG may impact the ability of MBL to make
scheduled MBLPA dividend payments and redeem or exchange at a future call
or exchange date.
•
Market conditions, including a deterioration in domestic and global funding
markets. This can negatively impact market liquidity, increase credit spreads
and reduce funding availability. In recent years global equity and debt markets
have experienced difficult conditions, resulting in reduced liquidity, extreme
volatility and declining asset prices, as well as greater counterparty credit risk,
widening of credit spreads and lack of price transparency in credit and other
markets.
•
Liquidity risk in matching cashflows with financial commitments as they fall due.
•
Legal, regulatory and compliance risk. Macquarie is supervised my a number
of regulators which include APRA, RBA, ASIC, ASX and ACCC in Australia.
Regulators may impose material penalties for breach of legal requirements.
•
Poor performance of acquired businesses.
•
Foreign exchange risk. A significant portion of MQG’s operating income is
derived and operating expenses incurred from offshore business activities,
which are conducted in a broad range of currencies and with counterparties
around the world.
•
Market and asset price risk.
•
Interest rate risk. A mismatch between the interest rate risk on assets and
liabilities could have an adverse financial impact.
•
Operational risks and trading errors.
•
Increasing competition.
•
Credit rating downgrades.
Refer page 54 of the prospectus for further information on risks.
Page 11
Macquarie Bank Capital Notes
16 September 2014
Research Team
Fixed
Income
Bell Potter Securities Limited
ACN 25 006 390 772
Level 38, Aurora Place
88 Phillip Street, Sydney 2000
Telephone +61 2 9255 7200
www.bellpotter.com.au
Staff Member
Title/Sector
Phone
@bellpotter.com.au
TS Lim
Head of Research
612 8224 2810
tslim
Sam Haddad
Industrials
612 8224 2819
shaddad
John O’Shea
Industrials
613 9235 1633
joshea
Chris Savage
Industrials
612 8224 2835
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613 9235 1601
jsnape
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Industrials
612 8224 2886
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612 8224 2879
bcalwell
John Hester
Healthcare
612 8224 2871
jhester
Tanushree Jain
Healthcare/Biotech
612 8224 2849
tnjain
TS Lim
Banks/Regionals
612 8224 2810
tslim
Lafitani Sotiriou
Diversified
613 9235 1668
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Peter Arden
Resources
613 9235 1833
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Stuart Howe
Resources
613 9235 1782
showe
Fred Truong
Resources
613 9235 1629
ftruong
Quantitative & System
612 8224 2825
tpiper
Industrials
Financials
Resources
Quantitative
Tim Piper
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and the UK this research is only for institutional investors. It is not for release, publication or distribution in whole or in part to any persons in the two specified countries. This is general investment
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provided you with this report by arraignment with Bell Potter Securities Limited) should be made aware of your relevant personal circumstances and consulted before any investment decision is
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Bell Potter Securities Limited and its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete
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